What Is XRP?

What Is XRP?

XRP is a cryptocurrency and token Ripple Labs uses to facilitate transactions on its network. XRP primarily enhances global financial transfers and the exchange of several currencies. Investors also use it to store value and profit from price fluctuations.

The History of XRP

Ripple is a centralized financial technology (fintech) company building different products to solve global payment issues through its remittance system, payment settlement, and exchange. The company began as Ripplepay, founded by software developer Ryan Fugger in 2004. This period was before Bitcoin, the world’s leading cryptocurrency, came into the spotlight. Ripple was later co-founded by Chris Larsen and Jed McCaleb in 2012.

The goal behind Ripple was similar to the vision of Bitcoin creator Satoshi Nakamoto, which was to foster an easier, faster, and more secure way to make transactions globally. The tradeoff with Ripplepay was that it didn’t rely on the blockchain; instead, it was centralized.

In 2011, McCaleb, David Schwartz, and Arthur Britto started developing the XRP ledger as a recourse to the inherent limitations of Bitcoin. In 2012, when the XRP ledger was launched, it incorporated the native token XRP to aid its function. This team of engineers was later joined shortly after by Larsen, who now sits as Ripple’s executive chairman and co-founder.

Ripple changed its name several times from 2012 to 2015. First, in 2012, it changed its name from Newcoin to OpenCoin. Then, in 2013, it was renamed Ripple Labs. Finally, in 2015, it rebranded and became Ripple as its popularly known today.

Ripple and XRP

Although XRP is often referred to as Ripple, it’s important to know that XRP is an open-source digital asset independent of Ripple, which is a technology company. Due to its fast, efficient, reliable, carbon-neutral, and fast delivery, XRP is the technology that Ripple uses in its solutions to help customers stay compliant.

XRP operates on its decentralized, open-source blockchain known as the XRP ledger (XRPL), and transactions are facilitated by the Ripple transaction protocol (RTXP). Unlike most cryptocurrencies, XRP is pre-mined, with a maximum token supply of 100 billion. The token’s total supply was/are distributed in three ways:

• First, 80 billion XRP tokens were allocated to Ripple, the parent company. To ensure a stable supply of XRP, the company locked 55 billion of the token in an escrow account.
• Then, Ripple co-founders and the core team received the remaining 20 billion XRP.
• The remaining XRP are released at a rate of less than 1 billion per month, with the original release schedule targeting 55 months.

The initial idea behind XRP from the onset was straightforward and was described as a peer-to-peer trust network. Ripple cites XRP as a faster, cheaper, and more energy-efficient digital asset that can process transactions within seconds and consume less energy than some counterpart cryptocurrencies.

Typically, XRP is created to serve as a settlement layer facilitating the transactions with the Ripple network. It has been traded as a cryptocurrency and is available on several exchanges, including futures, options, swap exchanges, spot exchanges, custodian exchanges, and non-custodian exchanges.

Concerns About XRP

Over the years, many issues have surfaced regarding XRP, within the crypto community and from regulatory bodies. The most notable events have been with the U.S. Securities and Exchange Commission (SEC).

FinCEN

The first regulatory encounter was in May 2015, when the U.S. Financial Crimes Enforcement Network (FinCEN) charged Ripple Labs and XRP a sum of $700,000 for violating the Bank Secrecy Act by selling XRP without authorization and for failure to implement the anti-money laundering (AML) program. Ripple Labs agreed to remedial actions, including implementing the AML program and registering with FinCEN.

Securities and Exchange Commission

Later, in December 2020, Ripple's CEO, Brad Garlinghouse, informed the public about the SEC's plan to sue the company. Days later, on Dec. 22, the SEC filed a lawsuit against Ripple for selling XRP as an unlicensed security. The agency claimed that distributing $1.3 billion worth of Ripple's XRP token to its stakeholders violated its law. At the time, XRP was the third-largest cryptocurrency by market capitalization.

In 2019, ahead of the SEC, some XRP stakeholders also filed a lawsuit (filed by XRP investors). This suit was based on the allegation that Ripple founders had an "intent to deceive or defraud" its investors. 

For the SEC, the argument was whether XRP, the native token of Ripple, is a security—indicating a share in Ripple—or if it genuinely is a cryptocurrency like Bitcoin. The SEC noted that CEO Garlinghouse and co-founder Larsen have profited from selling their XRP during the bull market and garnering more than $600 million.

The case of SEC v Ripple was finalized on July 13, 2023. The court ruled that Ripple violated securities laws by offering unregistered securities to institutional investors but didn't when selling XRP on exchanges.

Price Volatility

With XRP positioned as an alternative to bitcoin, it has gained massive adoption over the years from various communities, causing its prices to soar.

Most notably, at the height of the crypto bull market from 2017 to early 2018, XRP reached an all-time high of $3.40. This was a 53,435% jump from its price of $0.006531 at the beginning of 2017. Since then, it has experienced an exponential decline, yet it maintains a firm position as a significant coin regarding its market capitalization. It currently sits at the fifth position on the cap table.

It is important to note that the mechanism behind transactions of XRP doesn’t require a transaction fee, which is a standard feature for most cryptocurrencies. Instead, it requires the sender to burn a tiny portion of the XRP, which positions XRP as a deflationary asset.

Being a deflationary asset allows the supply of XRP to run down to zero. However, it has been estimated it will take approximately 70,000 years at its current burn rate for that to happen. And scenarios like this can be mitigated by validators by adjusting the transaction cost and prices through a voting system as long as all requirements are met.

XRP vs. BTC

There has been a lot of back and forth concerning the differences between XRP and Bitcoin. Although there are similarities between both coins in their respective areas, their differences are vast, some of which include the following. 

Consensus Mechanisms

The consensus mechanisms used in validating transactions are different. XRP uses a unique consensus mechanism that relies on trusted validators or a Unique Node List (UNL) that decides what transaction to consider for the next ledger. For transactions to become valid, most trusted validators need to agree. On the other hand, Bitcoin relies on miners to solve complex mathematical problems—using proof of work—in validating transactions.

Cheaper, Faster, and Energy Efficient

XRP’s unique consensus mechanism allows it to authenticate transactions faster and cheaper. This process consumes far less energy. It’s the opposite for bitcoin and most cryptocurrencies, whose mining process causes transaction confirmation to take longer and cost far more. The proof-of-work mechanism contributes to Bitcoin’s enormous energy consumption.

Scalability of XRP

The XRP ledger is scalable and can handle up to 1,500 transactions per second. Bitcoin’s transactions per second average between four and five, while Ethereum maintains about 13 transactions per second. The introduction of the Lightning Network that assists the Bitcoin blockchain solves its scalability problem.

The Bottom Line

In spite of its many controversies, XRP remains one of the top cryptocurrencies by market cap. It can be used just like any other digital currency, for transactions or as an investment. If you choose to invest, however, be sure that you don’t invest more than you can afford to lose.

The comments, opinions, and analyses expressed on Investopedia are for informational purposes online. Read our warranty and liability disclaimer for more info. As of the date this article was written, the author does not own cryptocurrency.